India’s Economic Opportunities In Africa: Will Modi’s Visit Deliver?

Wednesday 10 August 2016

by Roshan Iyer

As of 2015, Indo-African trade stands at $ 71.65 billion making up 10.6 per cent of India’s world trade. Prime Minister Modi’s four-day trip was a bid to expand Indo-African ties in two key areas: trade and investment, and greater diplomatic cooperation. The continent hosted four out of the 10 fastest growing economies last year and demand for investment and projects have ballooned by 300 per cent since 2009. Africa’s existing diaspora on the continent along with historic ties shared by the continent and India provide ample opportunity for greater economic ties. India must also keep in mind the Chinese influence in the continent, in particular on the investment front. This was Prime Minister Modi’s second tour to Africa after his visit last year to Seychelles and Mauritius.

Indian Economic Presence: Breakup of Indian-owned Businesses in Africa

The Indian community contributes substantially to the local economies comprising a large portion of the medium and small enterprise (MSME) sector of the economy. Most Indian-owned MSMEs in Africa operate in the manufacturing, textiles, chemical, and food industry. Out of a total of two million, around 1.4 million Indians, many of Gujarati origin, live in the four countries that Prime Minister Modi visited.

A large number of Indian conglomerates also have a significant presence in Africa. The Indian private sector is spread across the following sectors.

Source: Indo-Africa Business Companies Listing

The majority of Indian owned firms in Africa are engaged in the manufacturing sector of the African economy. These firms are able to take advantage of the low labour costs in Africa. Africa also provides access to the Indian Ocean easing the export process. The miscellaneous sector was made up of trading firms and import export firms.

Nature of Indo-African Trade: Who is Benefitting?

In 2014-15 trade with Africa contributed around $71.65 billion or 9.4 per cent of India’s total trade. It made up 10.6 per cent of India’s total exports or $ 32.8 billion. While in terms of imports, India imported $ 38.8 billion or 8.7 per cent of its total imports. There has been tremen-dous growth since 2008 when trade stood at $ 35 billion and 1995 when it was at $ 1 billion.

Within Africa, Nigeria, South Africa, Angola, Egypt, Algeria and Morocco account for 89 per cent of total African exports to India. Their exports are dominated by oil and gas (66 per cent), ores and gold (16 per cent). Outside these six African exporters, India runs a trade surplus with 40 out of the 54 African countries.

Source: Brookings

Source: UN Economic Commission for Africa

The nature of trade between India and Africa is clearly inverted in terms of the breakup which is in favour of India. Raw materials are crucial to fuel industry production while Africa also provides sizeable markets for the secondary (manufacturing and processing industries) sector of the Indian economy.

Indian Investment into Africa: Are there Opportunities?

Indian investment in Africa, estimated at over $ 50 billion, is larger than that of China’s but over 90 per cent of that goes to one country—Mauritius, a popular tax haven for Indians. All the countries selected for Prime Minister Modi’s trip countries (Kenya, South Africa, Mozambique and Tanzania) are the largest importers of processed oil products explaining one aspect of their importance to India.

India’s technology and capital investments will stimulate local productivity. India’s private sector has played a pivotal role in the expansion of trade relations. The Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI) have organised trade conclaves which provide a platform for the corporate sectors of India and Africa to interact and forge business ties.

Source: CII Africa Conclave

The opportunities demanded by the African nations have shown steady growth in both number and value since 2010. Since 2009, the average project value has grown by three times with an average of 34 per cent per cent growth each year.

India’s Technical and Economic Cooperation programme (ITEC) and its associated programme, Special Commonwealth African Assistance Programme (SCAAP), provide a platform for cooperation programmes conceived in regional and inter-regional context including training (civilian and defence) of select ITEC partners countries, projects, feasibility studies, and consultancy services. Lines of credit are also offered under ITEC and African nations have been the major beneficiaries. India has involved 50 institutions conducting more than 275 training courses on subjects which are of interest to working professionals in developing countries; Uganda, Rwanda and Burundi have availed most of the benefit from the programme. ITEC and SCAAP also manage the Lines of Credit (LOC) that India extends to other countries.

One major India-Africa project under ITEC is the “Pan African e-Network” project which connects India to the African states through a satellite and fibre-optic cables enabling India and Africa to share expertise, knowledge and data electronically.

Results from PM Modi’s Trip

India is the sole Asian member of the African Union’s Capacity Building Foundation. The foundation funds development and capacity building projects and programmes submitted by member-countries and non-state actors at both the national and regional levels.

The Indian and South African governments signed MoUs on IT, communication, tourism, science and technology innovation, and cultural cooperation. Agreements were signed between the industrial giants of both India and South Africa in the areas of mining and mining equipment, health care, water and waste management, defence technology and railway technology. The biggest agreement was signed between the Dube Trade Port and Cipla India, setting up a medical plant in the special export zone to produce cheaper drugs for both African and export markets. Both governments look forward to greater cooperation in renewable energy, water management and infrastructure development in the future.

In Tanzania, the two nations signed four investment-related MoUs (out of five in total). An agreement between National Small Industries Corporation of India and Small Industries Development Organisation, Tanzania was signed. The two governments signed an MoU and agreed on a Line of Credit in the area of water resource management and development. India agreed to create a $ 92 million LOC to Tanzania for rehabilitation and improvement of the water supply of the Zanzibar (a semi-autonomous island territory of the country). Another MoU was signed for establishment of a vocational training centre at Zanzibar. The last MoU is a visa waiver for diplomatic/ official passport holders of both nations.

In Kenya, India has agreed to extend a Line of Credit worth $ 44.95 million to be mainly used to encourage the development of small and medium enterprise as well as development of the textile sector. India also plans to fund the building of a cancer hospital and donate pharmaceutical and medical supplies to the country. The issue of terrorism and maritime security as common problems were also brought up by both sides.

For Mozambique, the Union Cabinet approved a Memoranda of Understanding (MoU) to double the import of pulses either through private channels or state agencies. This should stabilise the supply and prices of pulses in India.

South Africa and Tanzania were clearly the focus of the diplomatic visit. The private sector showed interest in South Africa with a large amount of technology sharing occurring in the areas of mining, defence and railways. South Africa has had substantial economic ties with India since 1994 and is a relatively developed country on the African continent. The visit allowed for expanded cooperation between the private sectors of the two countries. The pharmaceutical deal is of substantial importance as both India and South Africa have stood together against developed nations on the issue of generic drugs. The continent is need of low cost medicines while the plant will benefit from lower labour cost and transport costs.

The agreements involving Tanzania entailed much more aid and development related cooperation. The establishment of the vocational training centre is a small step towards bringing skill development to the country. The focus on Zanzibar may have to do with its free port area, which provides support services, storage facilities and other infrastructure to trading vessels on the Indian Ocean. Zanzibar also holds economic importance to India as it has two designated export-producing zones. The establishment of water management systems will pave the way for Indian firms to set up and utilise the island. The Tanzanian Government has in particular encouraged the development of offshore financial services on the island. There was also a focus on development and enterprise building rather than trade in Kenya.

Dealing with China: Coexist rather than Compete?

In 2015, China’s trade with Africa at $ 300 billion dwarfed India’s presence in the African economy, the majority of which is in energy, mining, construction, and manufacturing. According to a 2012 announcement, China’s investment into Africa is $ 40 billion, out of which $ 14.7 billion is direct investment. 70 per cent all Chinese investment is concentrated in Nigeria, South Africa, Sudan, Algeria, Zambia, Guinea, Ghana, Democratic Republic of the Congo and Ethiopia which are located more towards Central and West Africa.

China also holds a Forum on China-Africa Cooperation and has organised five summits since 2000. China has extended credit up to $ 60 billion and begun initiatives on food security, agriculture and infrastructure in Africa.

This is not to say that opportunities do not exist for India. Africa’s heavy dependence on Chinese demand led to many previously rapidly growing economies slumping due to China’s economic slowdown and its diminished demand for African raw materials. India provides an opportunity for African economies to diversify their market base. Encouraging investment into non-resource sectors through FDI and the creation of special economic zones would help diversify African economies. Mineral fuels account for 70 per cent of Africa’s exports to China and 80 per cent of exports to India. Chinese exports to Africa include industrial machinery, electrical and electronic equipment. India’s export basket to Africa has also undergone significant changes from cereals and food products to refined petroleum, automobiles and pharmaceuticals which includes an element of knowledge sharing and technology exchange.

In terms of investment, India should not emulate Chinese investment focus on resource extraction in Africa. India should make sizeable investments in healthcare, education, and information technology sectors, areas that are India’s traditional strengths. India could set up an entity similar to the China-Africa Develop-ment Fund which has invested in 30 projects in Africa worth around US $ 800 million, focusing on industrial development and raw materials.

Creating a dependence on raw material exports, will result in the African economy contracting the ‘Dutch Disease’; an over-dependence which will hamper growth in other industries and create an economy solely reliant on world demand and prices of raw materials. Investments in non-resource sectors would give India a unique advantage over Beijing’s investment into real estate and natural resources. Structural investments could give India its first foothold on the continent’s economy.

What Next?

With increased ties in both the private and government sectors, the next area of engagement between India and Africa should be on renewable energy technology. As Africa enters the modern Global economy with a growing manufacturing and export base, it will invariably butt heads with developed nations on the issue of climate change. India, which is already involved in these confrontations, will make a powerful ally for African nations in multilateral and inter-national institutions.

Terrorism is also another global issue affecting both India and Africa. India has had a limited presence along the African coast line in the past, but both sides are increasingly concerned about piracy, drug trafficking and security of sea routes. India has deployed its Navy in the Gulf of Aden in the past to deal with the piracy challenge as most African navies are ill equipped to deal with these threats. Expanding coope-ration in African waters could also help combat terrorism issues rising from the presence of Islamic State in Libya and Al Shabaab in Somalia. India-Africa-China cooperation might be beneficial in this sector considering China’s military presence in Djibouti.

The visit by Prime Minister Modi should work to support the upcoming India-Africa Forum Summit in Delhi. In addition to diversifying trade and investment flows, Africa has expressed the need for greater Indian involvement in health and environmental security. Both countries should also further expand cooperation on the Blue economy and maritime issues. Africa holds great promise for sustained growth and is hungry for investment. India should continue engaging with the East Coast countries in terms of investments and civic issues but slowly expand to the rest of the continent.

The author is a Researcher, International Strategic and Security Studies, National Institute of Advanced Studies (NIES), Indian Institute of Science Campus, Bangalore.